The European Central Bank (ECB) has challenged the idea that stablecoins are a “safe haven” for investors during market turmoil, stating that they are in fact heavily influenced by US monetary policy. revealed.
This research paper investigated the link between US monetary policy, money market funds (MMFs), and stablecoins. “Monetary policy, particularly the US dollar, is the linchpin that connects crypto markets and traditional financial markets,” the authors concluded.
The paper argues that stablecoins (with fixed prices, typically pegged to fiat currencies, often the U.S. dollar) can be used to increase the value of stablecoins from within traditional financial markets, such as changes in U.S. monetary policy (e.g., rising interest rates). argued that they are vulnerable to shocks that occur.
Evaluating data from 2019, the ECB claimed that the US government’s interest rate hike caused stablecoin market capitalization to decline by 10% in the subsequent 12 weeks. Meanwhile, it turns out that traditional non-crypto assets such as money market funds actually received significant inflows of new capital during the same period.
A money market fund is a type of fund that invests in short-term debt securities, such as U.S. Treasury bills, and is generally considered one of the most conservative, low-risk investment options.
The paper argues that as monetary policy tightens, investors are reducing demand for stablecoins for speculative purposes.
The paper said: “Shocks from monetary policy contraction will be negative for cryptocurrencies.As the opportunity cost of holding unregulated non-interest bearing assets increases in an environment of rising interest rates, investors (with the luxury of) “We will move towards investment assets that are more affordable.”
This paper also investigated the impact of events in the virtual currency world on the market capitalization of stablecoins. The ECB found that the market capitalization of stablecoins such as Tether and USDC experienced a significant decline during a “crypto shock”, a sudden devaluation of the overall value of Bitcoin.
In the aftermath of the “crypto shock,” stablecoins fell by about 4% on average. Examples of cryptocurrency shocks include Tesla’s decision to suspend payments from the Bitcoin network, China’s cryptocurrency crackdown, the collapse of TerraUSD/LUNA, and the sudden bankruptcy of FTX.
As a result, we concluded that monetary policy has a greater impact on stablecoins than on the crypto world. For example, during the “crypto winter” of 2021, major stablecoins like Tether took a big hit in market capitalization, although not as much as non-dollar-pegged currencies like Bitcoin.
In contrast, the paper concludes that, at least at the time of writing, large swings in the crypto market have little impact on the traditional financial world. They found that there is minimal correlation between major events in the crypto world and inflows into money market funds, such as U.S. stock market prices.
The paper does not take into account central bank policies in other major countries.
Edited by Andrew Hayward
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